Corporate Finance: Analysis and the Emerging Business Trends

Posted in Finance Articles, Total Reads: 3220
, Published on 13 February 2013

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Imagine that you were to start your own business. No matter what type you started, you would have to answer the following three questions in some form or another:

Firstly, what long-term investments should your firm take on? The answer for this deals with the line of business you will be in and the type of capital assets you will be requiring to carry on the firm’s operations. In Corporate finance, this is called capital budgeting.

Secondly, where will the firm get the long-term financing to pay for its investments? Also should you bring in other owners and use their money (equity) or should you borrow the money from outside (debt) and in what proportion these two financing techniques should be used to fund operations? Addressing such questions is called capital structuring.

Thirdly, how should the firm manage its everyday financial activities such as collecting receipts from customers and paying suppliers? The term for this in corporate finance is working capital management.

These are not the only questions which the firm will need to address but they are definitely among the most important ones.

Corporate finance is the study of ways to answer these three questions. Thus, it is the area of finance dealing with monetary decisions that business enterprises make and the tools and analysis used to make these decisions.

Besides at the time of starting up of the company, Corporate finance is also required for other major activities during the life of the company such as for research and development, expansion and diversification, replacement of assets, etc.

Relationship with other areas of Finance

The term corporate finance is often used synonymously with ‘Investment Banking’. Though both the fields involve raising capital for a company, Corporate finance also addresses other concerns as to when to acquire certain assets and pay off liabilities to maximize operational benefits and makes strategic decisions for the financial management of the company. Simply put, corporate finance is also defined as budget management arm of the company.

On the other hand, investment banking is completely different. The goal of investment banking is to raise a massive amount of capital by taking a company public (issuing shares through Initial Public Offer). Instead of borrowing money from one bank, the company can raise huge amount of funds by offering a part of the company's ownership to the general public. Alternatively, a private company can opt for private placement, which is nothing but borrowing money from wealthy individuals and institutional investors rather than from the general public.

Financial risk management, another field of study which is also often associated with corporate finance. By definition, it is the process of measuring risk for corporates and then developing and implementing strategies to manage that risk. The area is related to corporate finance in two ways. Firstly, the amount of business and market risk a firm is exposed to is directly related to the previous investment and financing decisions made by its’ finance manager. Secondly, the purpose of both these disciplines is to preserve and increase shareholder value.

Emerging Trends in Corporate Finance

One important emerging trend in the context of corporate finance is value-based management. Value-based management involves figuring out ways to create shareholder value through company’s activities. Some of the renowned companies today are using this approach to build shareholders’ confidence in the company.

Another trend we see today is that the salary packages in this area are on a rise.

According to a source, the average annual pay of CFO in Fortune 100 companies exceeds $1 million.

Corporate finance jobs today are considered as one of the hot-job categories. The hot job categories include the international and operationally-oriented positions and the shortages for such jobs is on a continuous rise.

Another significant trend we see is that women are making rapid inroads in corporate finance positions. Finance has become the first field of opportunity for women because promotions are based on merit and not the old-boy network as usually said in the field of marketing. Good examples of women succeeding in corporate finance include Heidi Kunz who engineered General Motor’s turnaround plan in 1992. She then became the CFO of a new ITT spinoff in 1995.

Fifthly, another huge trend is the growing interest in integrated methods of risk and liability management. Many companies have decentralized their risk management activities where each division or SBU can protect or defend itself from financial losses experienced from fluctuating prices and interest rates (also called hedging). The companies are increasingly permitting this, but aggregation positions into a book at the corporate level and adding controls. Thus, ‘integrated risk management’ is gaining importance.

Financial professionals today are focussing on the need to develop ‘negotiation skills’ because employees who ace such skills are able to settle business negotiations at a good price while building corporate relations at the same time.

Also, apart from this, leadership abilities of a finance manager are also being valued more and more because due to the dynamic nature of financial markets, there lays a huge demand for leaders and innovators who can strategically plan for future financial actions and solve the current risky problems in a given scenario, thus managing and leading the company well with clear defined strategic goals and directions.

The roles in the field are increasing in horizontal as well as vertical depth, focussing on maximization of the return on investment of the assets in a company and managing the overall financial standing of the company rather than just raising money and making financial decisions. This means that the demand for smart, communicative and thoughtful people in finance positions will increase even more in the future.

For smaller firms today, there is a different set of threats and opportunities when it comes to corporate finance. For start-ups, the avenues for funding deals are fewer as compared to big companies. In order to attract the attention and the funds of investors, the emphasis on quality of business proposition and of management is growing.

Venture capital financing is a growing trend. Entrepreneurs usually seek venture capital when they need capital but are unable to raise it elsewhere. However, this source of funding was earlier not available for start-up companies since they have not yet produced earnings but now the trend is changing a little with effective and promising business plans getting the right amount of finance from venture capitalists.

Thus with these growing trends, corporate finance is definitely on a rise with the growing its growing importance, dimensions, significance and demand for jobs in this field.

This article has been authored by Samiksha Kamra from Great Lakes Institute of Management.